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  • ABC Analysis Rajnish Kumar
    • What is ABC analysis ?
    • ABC analysis is done to identify the quality of inventory that a retailer is holding.
    • It classifies items based on set criteria of sales and profits
    • Why is it done ?
    • It helps to understand what is the contribution of various product lines to the profits and which products are blocking the working capital due to slow movement.
    • Then outcome is to optimize the inventory so as to have the most efficient products in your line
  • What is A,B and C ?
    • When carrying out an ABC analysis, inventory items are valued and then ranked. The results are then grouped typically into three bands. These bands are called ABC codes :
    • A class inventory will typically contain items that account for 80% of total value, or 20% of total items.
    • B class inventory will have around 15% of total value, or 30% of total items.
    • C class inventory will account for the remaining 5%, or 50% of total items.
    • Nomenclature remaining the same the classification parameters may change based on business realities and requirements.
  • The Pareto Principle
    • The Pareto principle also known as the 80-20 rule or the law of the vital few states that, for many events, roughly 80% of the effects come from 20% of the causes
    • It is a common Thumb rule in business.
    • Ex : 80% of your sales can come from 20% of your products or 20 % of your clients give you 80 % of your business.
    • 20 % of the rich countries contribute more than 80 % of the world’s GDP and 20 % of India’s Population pays 80 % of the Tax collected !
  • ABC in Category Management
    • Like many other areas the ABC analysis is widely used in category management too.
    • Buyers may use sell thru % analysis to arrive at the top 20 articles and then see what percentage of sales or margin they are responsible for.
    • The sell thru analysis is a factor of denominator or base on which the sell through is determined so if the base is small then it may cause a big variance in terms of contribution to overall sales
    • It simply means that if we only purchased 100 pieces and 80 of them got sold across 20 stores then this product may not have a significant role to play in overall sales or profitability
    • Therefore, it is important to look at sell thru % in conjunction with absolute qty sold and its value before taking any decisions
  • Inventory Optimization
    • A simple tool that may be used to optimize the inventory is to measure inventory efficiency
    • Inventory efficiency can be defined as % contribution of a product or a sub cat to sales divided by % contribution to the stock of that category.
    • Inventory efficiency of 1 suggests that the product in question contributes equally to the sales as well the stock so it may be continued
    • Similarly an inventory efficiency of 0.5 tells that the product is not doing well and may need to be discontinued or reduced in buying value.
    • An important observation is that an efficiency of greater than 1 for Ex. Inventory efficiency of 3.5 may suggest widespread stock outs and the fact that the product is not getting replenished as frequently resulting in lost sales
  • What Actions to take ?
    • After classifying items into ABC following actions may be initiated :
    • Increase buying of class A items and increase investment in Inventory of these products
    • Reduce or eliminate items which are C class items as these products probably do not meet the value expectations or taste of the consumer
    • Inventory optimization is a continuous process and the items may keep falling in ABC or categories as the market evolves, new competition emerges and the business lifecycle of the retailer attains maturity.
  • Impact of ABC analysis
    • Improved Working capital
    • Freshness and relevance of Merchandise
    • More efficient resource planning
    • Reduced manpower requirement
    • Consolidation of suppliers
    • Higher In stock %
    • Customer satisfaction
    • Better space allocation
    • MORE from LESS is the Net effect